Greetings, and welcome to Motorsport Games Inc. Third Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded. It is now my pleasure to introduce to Ken Godskind.

Thank you, Ken. You may begin..

Thank you, and welcome to Motorsport Games third quarter 2022 earnings conference call and webcast. On today’s call is Dmitry Kozko, Motorsport Games’ Executive Chairman, CEO and interim CFO. By now, everyone should have access to the Company’s third quarter 2022 earnings press release filed today after market close.

This is available on the Investor Relations section of Motorsport Games website at www.motorsportgames.com. During the course of this call, management may make forward-looking statements within the meaning of the U.S. federal securities laws.

These statements are based on management’s current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements.

Except as required by law, the Company undertakes no obligation to update any forward-looking statements made on this call or to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise.

Please refer to today’s press release and the Company’s filings with the SEC for the quarter ended September 30, 2022 for a detailed discussion of certain risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today.

In today’s conference call, we will refer to certain non-GAAP financial measures such as adjusted EBITDA as we discuss the third quarter 2022 financial results. You will find a reconciliation of these non-GAAP measures to their most directly comparable GAAP measures as well as other related disclosures in the press release issued earlier today.

And now, I’d like to turn the call over to Dmitry.

Dmitry?.

Ignition game for Xbox, PlayStation and PC, we released the 2022 Season Update DLC free of charge to the existing owners of the game. We believe this was a necessary investment for the long run, as our NASCAR license is not due to renew until 2030.

Additionally, we shifted gears and started to work on our NASCAR 2023 title, while at the same time we have been hard at work for developing of our INDYCAR and 24 Hours Le Mans gaming experiences. Motorsport Games is committed to being a good stewards of these iconic racing brands.

And our commitment extends to our fans that have been patient with us to deliver them the gaming experience they deserve. Thank you for those that support us and believe in us. It means a lot to the team here. On a esports front, we’ve been making big strides.

In Q3, we launched our 2022 into 2023 Le Mans Virtual Series, which is another star packed grid and increased viewership from the year before. We thank our sponsors who came along for the ride and who allowed us to continue to increase the production and entertainment value of this exciting racing series.

And we thank all participants and supporters of those participants for making this an exhilarating experience. In Q3, we also ramped up our activities where the fans are at the tracks. We made sure to bring the latest BTCC content on rFactor 2 for the fans to try at the four recent BTCC events. Now, BTCC content is available for all on rFactor 2.

Motorsport Games also showcased interactive INDYCAR game content at two recent INDYCAR events in Indianapolis and in St. Louis. And eager to showcase our 2022 NASCAR content to our NASCAR fans we recently attended five NASCAR races, running a nail biting competition on our NASCAR Rivals game.

We’re also pleased to announce that we have just completed our 1-for-10 reverse stock split on November 10th, with the goal to regain compliance with NASDAQ’s minimum closing price requirement for continuing listing.

In September 2022, we announced the 2022 restructuring program to reduce our operating cost, which is expected to generate annualized cost reduction of approximately $4 million by the end of 2023. To date, we made good progress by achieving annualized savings of approximately $2.5 million and are continuing efforts to achieve further cost reductions.

I’d like to now take the opportunity to discuss our financial results for Q3 2022 and our current liquidity position. Revenue for Q3 2022 were $1.2 million compared to $2.1 million for Q3 2021.

The $0.9 million or 43% decrease in revenues primarily due $0.6 million of lower digital game sales, driven by lower sales volume and lower pricing and an out of the period adjustment of $0.3 million, correcting an immaterial overstatement of revenues in the three months ended June 30, 2022.

Q3 2022 and net loss was $8.5 million compared to Q3 2021 net loss of $6.7 million.

The $1.8 million increase in net loss was primarily due to $0.1 million increase in sales and marketing spend, $0.8 million increase in foreign currency losses, a $0.6 million decrease in gross profit, $0.1 million increase in interest expense and $1 million increase in loss contingency reserves.

The increases in Q3 2022 expenses were partially offset by $0.4 million decrease in development expenses, $0.2 million decrease in other expenses and $0.1 million decrease in general and administrative expenses. Q3 2022 adjusted EBITDA loss was $6.5 million or $1 million increase in loss when compared to Q3 2021 adjusted EBITDA loss of $5.5 million.

The increase in adjusted EBITDA loss was primarily driven by the same factors causing the increase in Q3 2022 net loss. Revenues were $6.6 million and $6.9 million for the nine months ended September 30, 2022 and 2021, respectively, a decrease $0.3 million or 4% when compared to the prior period.

Gaming segment revenues decreased by $0.8 million or 12% to $5.9 million for the nine months ended September 2022, compared to $6.7 million for the nine months ended September 30, 2021.

The decrease in our Gaming segment revenue is primarily due to the lower retail revenues of $0.6 million, driven by higher retail pricing concessions, as well as a decrease in digital and mobile game sales of $0.8 million that was caused by lower volumes and pricing.

These decreases were partially offset by $0.6 million in additional revenue earned through the development of simulation platforms for third parties. Our Esports segment revenues increased by $0.5 million for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

The increase in our Esports segment revenue is due to $0.5 million of higher sponsorship revenues from our Le Mans virtual racing series events, which concluded its 2021 into 2022 season in January 2022 and commenced its 2022 into 2023 season in September 2022.

Net loss for the nine months ended September 30, 2022 was $32 million compared to $26.7 million for the nine months ended September 30, 2021.

The increase in net loss was driven by a $9.4 million increase in goodwill and intangible asset impairment, a $1.6 million increase in development expenditures, a $1.6 million increase in sales and marketing spend, a $1.4 million decrease in gains from equity method investment, a $1.7 million increase in foreign currency losses, a $1.1 million decrease in gross profit, and a $0.3 million increase in interest expense, and $1 million increase in loss contingency reserves.

These increases were offset by $12.8 million of lower general and administrative expense. For Q3 year-to-date 2022, adjusted EBITDA loss was $18 million, a $6 million increase when compared to the $12 million adjusted EBITDA loss for Q3 year-to-date 2021.

The increase in adjusted EBITDA loss was primarily driven by the same factors as the increase in net loss for Q3 year-to-date 2022 when compared to Q3 year-to-date 2021. We expect to continue to incur significant operating losses. As a result, we will need to grow our revenues to reach profitability and positive cash flows.

We expect to continue to incur losses for the foreseeable future as we continue to develop our product portfolio and invest in development of new game titles. As of October 31, 2022, Company had approximately $1.8 million of cash and cash equivalents, which we believe is insufficient to fund our current operations for the remainder of 2022.

We will need to supplement our available liquidity with additional debt and our equity financing, cash generated by cost control initiatives, and our additional changes to our product roadmap to reduce the working capital requirement. Thank you for joining us today. And now, let’s go to questions.

Operator?.

Thank you, sir. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jason Tilchen with Canaccord. Please proceed with your question..

Thanks. Thanks for taking the question, Dmitry. I have a few. Just to start, maybe you could spend a minute talking about the reception and feedback you’ve gotten from consumers related to both the expansion pack in the first week of October and then the Switch title that you released in the week following that.

How has the engagement trended so far, how sales of the Switch titles trended so far relative to your expectations?.

Thanks, Jason. Thanks for the question. We are tracking as per our expectation. We’re monitoring the positive feedback from the community, mostly geared towards our Switch title.

I had the pleasure firsthand hand to experience a very interesting competition at multiple events that we ran at the NASCAR track, where multiple of our products were showcased to the users.

And I got a chance to experience their actual live feedback, not the feedback behind Twitter walls or anything else, but realistically, seeing their eyes light up or other type of emotions that they experience when they enjoy the products. So, I could confidently say, Rivals is being received very well from the community, seems to be an enjoyment.

We do see an uptick in users playing the game and as well as the expansion pack. I think we are tracking that some users are actually appreciating that what we’ve done with releasing 2022 content for the NASCAR Ignition game and not charging them for it. We do see that there is some appreciation for it..

Great. That’s very helpful. And second one is just on the current financing situation. You mentioned in the press release the cash balance at the end of October sort of implies, given the burn rate that you’ll need to come up with a solution of the financing pretty soon here.

So, maybe just give us an update on where that stands, the options you’re currently evaluating, and how that’s expected to play out?.

You’re absolutely right with that. We’re continuing to explore all options available. Those options still include different types of form of debt financing. There’s couple of options in equity type of financing. There is options from the main shareholder with the existing credit line.

However, of course, we’re not sure, if there’s going to be ability or not to fund. That is something that’s up to them. But all those options are still on the table. They are being explored. And you’re absolutely right with assumption, we have to come up and announce something fairly quickly here to continue to support the growth of this business..

And you mentioned just in your prepared remarks about potential changes to the product roadmap. Could you maybe comment on how that fits in with the decision-making process here? And whether that would include a change to the 2023 NASCAR title, or is it more in relation to some of the other franchises you’re planning on launching next year? Thanks..

That’s another good question. We actually haven’t made any changes to the anticipated delivery dates of those products. What we have done is optimize the amount of tools that we invest in.

So, basically, focusing on making our development processes more efficient, so they do not require as much time to develop the product as were previously anticipated.

There’s more automation in testing processes that we have also implemented, certain type of tools on our tracks, vegetations and other elements that are necessary inside our racing games are being created and populated as content within the game.

So, those are the type of efficiencies that we’re also focused on, which basically allow us to get to the end result quicker. However, that speed is still we invest on making sure that the products are well polished before we bring them to market. But we currently do not anticipate delays from what we have previously said will be our 2023 releases..

Thank you. And the next question comes from the line of Michael Kupinski with Noble Capital Markets. Please proceed with your question..

Thank you. Most of my questions were already addressed, but I have a couple.

In terms of the fact that you have such iconic titles, are you seeing any interest from other larger gaming companies in terms of the business, are they pinging you at this point? Just wondering if there are other options outside of the ones that you just identified in terms of debt, changes in the product roadmaps, in terms of equity offerings and other, if that’s an option as well?.

Thanks, Michael, for the question. One thing that I could say is that all the, let’s call it usual suspects or the larger players in industry, are aware of us. We have had some form of communications with quite a few of them. And we are exploring different types of options. I cannot particularly say which options they are with them.

I wouldn’t say there’s anything definitive. But if there’s some sort of proposals that would come from their side, we would definitely explore..

And would those also include partnership agreements?.

Sure. We have explored, not just with gaming companies, potential partnership agreements that could help us provide additional liquidity, but we also explored such conversations with distributors and other partners who would value having us as a partner because of the iconic brands, like you mentioned, that we carry and are stewards of..

And Dmitry, when would you determine to delay product releases to time, the prospect of kind of minimizing some of the cash burn? And also would -- at this point, I would assume that you’re limited in terms of that potential strategy, kind of alleviate the issues that you have for this year.

I would assume you’re really talking more so about 2023 and beyond? Am I wrong about that..

You’re right, we’re focused on 2023 and the delivery of products. So, all resources are geared towards whichever would help us release quality gaming experiences on our projected time. Anything else right now could take a backseat. It’s not a priority of the business.

Hence, part of it participated in our restructuring plan already, which everything that we wanted to take into effect this year, we already did. And the future effects would come from efficiencies that we’re currently working on. So, we’ll continue to explore those things.

But I do not foresee to omit -- certain things that would go towards that delay of the products..

Have you taken any further aggressive action to reduce costs in let’s say the last month or -- you mentioned about trying to reduce the cash burn of course, but has there been any other actions that are taken more recently regarding that?.

No, not in particular, everything that we anticipated with our 2022 restructuring plan has been already executed. Of course, we’ll continue to explore additional areas of savings to reduce our cash burn potentially further. However, the Company is currently in its lean position and focused on the development resources.

And in those particular departments, we are expanding and investing in. So, anything towards the better good of our product and future product roadmap is where the focus and resources are all going.

So, we would not look for making any reduction in those areas because that’s quite honestly our livelihood, right? We are product based company, and we have to bring those good products to market.

And until we do so, we will continue to invest, so we’re incentivized to bring them as soon as possible, but at the same time, not sacrifice quality or the gaming experience that our fans would enjoy..

And Dmitry, can you remind me, do you have in your product roadmap any additional products for this year, or are most of that being concentrated in 2023 at this point?.

We have one more product release. We actually have seen our NASCAR franchise fans are still playing our 2020 title, the NASCAR Heat 5 title. Quite a few players are still in there enjoying themselves. So, we thought why not give them 2022 content update. So, we’re still working on couple of final polishes to deliver that content pack to them.

So, they will be an interesting one, because I don’t think our company in its history has provided this type of update to a product that’s essentially two years old. But we recognize that’s what our players are enjoying. So, we’d like to give them some additional content that would further increase enjoyment..

And is there marketing spend around that particular product, or is this just something that you are planning just to offer to the existing fan base and hope that -- I don’t know how much you would, how much marketing muscle you would put out behind an update like that?.

We continue to spend our budgeted marketing cost until the end of the year. We have made some optimizations to such, taking some of those spends more towards the track experiences. So, we get a chance to not only promote our products, but also gather on field feedback from the actual users.

Just like I mentioned before, those are things that I enjoy also participating in and seeing those things firsthand together with the great team. That’s how we optimized it. But we are getting into holiday sales very soon.

So, we do not want to reduce any of our marketing abilities or sort of muscle that we already planned for to not decrease kind of the opportunity size that we could seize from the holiday season. So, as far as I’m concerned, we are focused as an entire company on product of development, but we are not ignoring the upcoming holiday season.

And our budgeted marketing spend towards that holiday season are staying in intact..

And Dmitry, you may not be able to answer this question, but I thought I’d ask it anyway.

In terms of the cash burn then, can you give us your thoughts in terms of the cash burn for the upcoming quarter and what the shortfall might be?.

So, as you know, Michael, we don’t give sort of guidance numbers at this moment.

But I think it’s fair to assume, as we go into this, as we are in this Q4 and we just published our Rivals game, which does have cost attached to it when it comes to physical game cards that we had to manufacture, produce and distribute et cetera, so our normal monthly burn rate is still around that $1.5 million or so range, like we previously stated.

So, I think it’s fair to assume that, plus what we would potentially lay out or actually have for creation of those game cards could move that needle somewhere between $1.5 million to $2 million on the monthly burn rate..

Got you. Thanks for the color Dmitry and good luck..

Thank you, Michael..

[Operator Instructions] Our next question comes from the line of Mike Hickey with Benchmark. Please proceed with your question..

Hey, Dmitry, Ken, good afternoon, guys. Thanks for taking my questions. Dmitry, you had some -- you had some turnover on your executive team and your Board. Can you just give us some context in terms of why that occurred and how you are thinking about refilling some of those positions? Obviously, you can only wear so many hats.

Funding is probably your number one priority.

But as you sort of think about getting that funding and moving into ‘23 and building your next game, how do you rebuild your routine here?.

Thanks Mike for the question. So, fair question. Part about the independent Board members, right, as were stated in the 8-K and other disclosures, the main shareholder pretty much asked the independent Board members to resign as a result of a disagreement on a proposal of such directors to raise additional capital.

And that’s obviously put the Company in transactions that would require shareholder approval as a first, but it would also be potentially very-dilutive to all stockholders, based on where the stock has been. So, those members have accepted that and that’s what you have seen in a recent news.

However, we do plan to, of course, invite other independent Board members. Part of that our interim CFO, who was just recently with us, was able to step in and serve as our new member of the committee and one independent Board member.

We obviously have, according to the NASDAQ letter, 45 days to provide a plan to the NASDAQ staff on how we would fill other -- at least two other seats, to be in compliance with the audit committee composition of three of such members. So, we’re actively having conversations with those type of candidates.

And because John Delta had to step down from the interim CFO capacity and go to be our independent Board member, and previously, when John New was our CFO, that put me in a position to actively search for a more permanent CFO role. So currently, you’re absolutely right.

The focus continues to remain on -- from my side of the office is to solve a liquidity. And I am exploring all those available options. Therefore, finding and filling a CFO role is something that I will switch gears to more actively, as soon as we’re able to address our liquidity concerns..

Thank you, Dmitry..

At this time, there are no further questions. And that concludes the question-and-answer session. This also concludes today’s teleconference. You may disconnect your lines at this time. And thank you for your participation, and have a great day..